Historically, certain technologies have played a pivotal role in driving the stock market higher. That includes the internet in the 1990s, mobile devices in the 2000s, and cloud computing in the 2010s. Artificial intelligence is shaping up to the next decade-defining technology, and these Wall Street analysts are extremely bullish on Nvidia (NASDAQ: NVDA) and Palantir Technologies (NYSE: PLTR).

• Phil Panaro of Boston Consulting Group believes Nvidia will be an $800 stock by 2030. That forecast implies about 560% upside from its current share price of $121.

• Hilary Kramer of Greentech Research believes Palantir could be a $100 stock within a few years. That forecast implies about 175% upside from its current share price of $36.40.

Investors should never lean too heavily on forecasts. A recent study found that only half of price targets correctly predict which direction a stock will move, meaning far fewer predict the actual price with any degree of accuracy. However, Nvidia and Palantir warrant further consideration.

Nvidia: 560% implied upside

Nvidia dominates the market for data center graphics processing units (GPUs), chips that perform technical calculations faster and more efficiently than central processing units (CPUs). In practice, GPUs are used to accelerate complex workloads such as training machine learning models and running artificial intelligence (AI) applications.

Nvidia GPUs are the industry standard. Not only because they consistently outperform rival products, but also because Nvidia has a more robust ecosystem of supporting software that simplifies application development. That ecosystem, called CUDA, makes Nvidia GPUs the go-to option for developers. As proof, the company holds between 70% and 95% market share in AI chips, according to analysts.

Phil Panaro at Boston Consulting Group believes Nvidia’s next-generation GPU, called Blackwell, will further reinforce the company’s dominance in AI as the new chips start to percolate the market in the fourth quarter. Panaro noted that Nvidia stock traded sideways during the months prior to releasing its previous generation of GPUs, called Hopper.

“Once they released it, the stock went up hundreds of percent. So, I see the same thing happening with Blackwell,” he said in a recent interview with Schwab Network. Additionally, Panaro also said he expects Nvidia to generate $600 billion in revenue in fiscal 2031 (ends January 2031). That implies growth of 33% annually, which roughly matches Grand View Research’s prediction that AI spending will compound at 36% annually through 2030.

Story continues

Nvidia undoubtedly has a strong position in a rapidly growing market, and it has reinforced its dominance by branching into adjacent verticals like networking equipment and cloud infrastructure services designed for AI workloads. Even so, I see a valuation problem with Panaro’s forecast.

Maybe Nvidia will generate $600 billion in revenue in fiscal 2031. But a share price of $800 implies a market capitalization close to $20 trillion. So, Panaro’s revenue estimate implies a price-to-sales ratio of 33. Nvidia currently trades at 31 times sales, and that’s actually a premium to the three-year average of 26 times sales. I doubt Nvidia will command a higher valuation six years from now.

Having said that, I think Nvidia stock can outperform the S&P 500 through the end of the decade, perhaps substantially. Patient investors should consider buying a small position in the stock today.

Palantir Technologies: 175% implied upside

Palantir sells analytics software to commercial organizations and government agencies. Its products include the data management platforms Foundry and Gotham, and the artificial intelligence platform AIP. Those tools help customers integrate data, develop and manage machine learning models, and incorporate those assets into analytical applications that improve decision-making.

In August, Forrest Research recognized Palantir as a leader among vendors of machine learning and artificial intelligence platforms. The report analyzed companies based on the strength of their current offering and growth strategy. Palantir outscored every other vendor in terms of its current offering, but Alphabet and C3.ai received higher scores for product development strategy.

“Palantir is a true, true artificial intelligence company that really looks at data, analyzes it, and uses it for actual decision-making,” Greentech Research analyst Hilary Kramer told Fox Business. She brushed aside Goldman Sachs‘ price target of $16 per share, which implies 55% downside from the current share price of $36.40, saying major investment banks have yet to appreciate the full potential of Palantir’s software.

I think those investment banks would wholeheartedly disagree on the basis of valuation. Like Nvidia, Palantir has a strong presence in a quickly growing market. The International Data Corp. (IDC) estimates AI platform spending will increase at 51% annually through 2030. But Palantir trades at 217 times earnings, and the Wall Street consensus calls for annual earnings growth of 24% over the next three years.

Those figures give an outrageous PEG ratio of 9. For context, PEG ratios of 1 or 2 are usually considered to be reasonable. Given the current valuation, Wall Street is quite bearish on Palantir. The median price target of $27 per share implies 26% downside from its current share price. Personally, I would steer clear of this stock until the valuation comes down. That does not necessarily mean Palantir shares will crash any time soon. I am simply pointing out that the stock is very expensive, which means the risk-reward profile is heavily skewed toward risk.

Should you invest $1,000 in Nvidia right now?

Before you buy stock in Nvidia, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Nvidia wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $743,952!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 23, 2024

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Nvidia and Palantir Technologies. The Motley Fool has positions in and recommends Alphabet, Goldman Sachs Group, Nvidia, and Palantir Technologies. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.

A Once-in-a-Decade Opportunity: 2 AI Stocks to Buy Before They Soar 175% and 560%, According to Certain Wall Street Analysts was originally published by The Motley Fool